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A preference is an antecedent transaction, that can be pursued in a corporate Liquidation (if the directors of a company have ‘preferred’ one creditor over others) or in a personal insolvency (if the Bankrupt is found to have paid back one or more creditors before (in preference to) others).
The officeholder must prove that the company (via the directors) or the Bankrupt was influenced by the desire to pay back that creditor (or a lender) in order to place them in a better position than they would have been in had the preference not been given.
This repayment must have been performed in an anterior period or relevant time counting back from the commencement of the insolvency event (the Liquidation, Administration or Bankruptcy Order) and that the company or debtor was insolvent at the time.
The reason for pursuing a company’s directors or the Bankrupt for a preference is to claw the moneys paid back, in order to enhance the fund available to creditors.
In a corporate situation the directors could be pursued for ‘misfeasance’ (breach of their fiduciary duty) and in a personal insolvency situation the sum paid out can be reclaimed from the recipient.
[See ‘Antecedent Transaction’, ‘Misfeasance’, ‘Fiduciary Duty’, ‘Bankrupt’, ‘Bankruptcy’, ‘Bankruptcy Order’, ‘Liquidation’, ‘Administration’ and ‘Director’.]
A preferential creditor is one who is granted preferential status during an insolvent Liquidation, by receiving the right to first payment, a hierarchy established by the Insolvency Act 1986. This ‘hierarchy’ is sometimes called ‘a waterfall of payments to creditors’, or ‘priority’; in that certain types of creditors will be paid in priority to other types.
When a company goes into Liquidation, each class of creditors must be paid in full (the exception being ‘prescribed part’ secured creditors) before funds are allocated to the next.
Creditors are ranked as follows:
